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Stock Market News for May 5, 2021

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Wall Street closed mostly lower on Tuesday on concerns of higher inflation and earlier-than-expected hike in the benchmark interest rate. expectations of reduction in monetary stimulus and higher corporate tax rate also dented investors' confidence. The S&P 500 and the Nasdaq Composite ended in red while the Dow managed to gain marginally.

How Did The Benchmarks Perform?

The Dow Jones Industrial Average (DJI) was up 0.1% to close at 34,133.03. The index bounced back from a intraday loss of 370 points.  Notably, 16 components of the 30-stock blue-chip index ended in the red while 14 in green.

The tech-heavy Nasdaq Composite finished at 13,633.50, tumbling 1.9% or 261.61 points due to weak performance by large-cap technology stocks. This was the biggest single-day decline of the teach-heavy index since Mar 24.   

Meanwhile, the S&P 500 dropped 0.7% to end at 4,164.66. The Technology Select Sector SPDR (XLK), tumbled 1.8% while the Materials Select Sector SPDR (XLB) gained 1.1%. Notably, seven out of eleven sectors of the benchmark index closed in the red while four  in green.

The fear-gauge CBOE Volatility Index (VIX) was up 6.4% to 19.48. A total of 12.21 billion shares were traded on Tuesday, representing highest single-day trading volume in more than a month. Decliners outnumbered advancers on the NYSE by a 1.47-to-1 ratio. On Nasdaq, a 2.60-to-1 ratio favored declining issues.

Concerns About Inflation and Rate Hike

In an interview with the Atlantic magazine, Treasury Secretary Janet Yellen said that the Fed may need to hike the benchmark interest rate to prevent the economy from overshooting. “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said. Notably, Fed is maintaining the benchmark interest rate at its lowest level of 0-0.25% since March 2020, on the onset of the global outbreak of the coronavirus.

U.S. consumer spending climbed 4.2% in March buoyed by strong pent-up demand and $1.9 trillion coronavirus-aid package injected by the Biden administration. Notably, the U.S. government has injected more than $5.3 million of fiscal stimulus so far since March 2020.

On the other hand, despite strong pent-up demand, most of the businesses are suffering from growing input prices owing to widespread shortages of parts, materials and labor. Market participants are concerned that strong pent-up demand will result in demand-pull inflation while input cost will lead to cost-push inflation, overheating the economy.

In order to contain inflation, Fed needs to contract monetary stimulus. Fed Chairman, Jerome Powell already said that the central bank will reduce its quantitative easing program of purchasing $120 billion of bonds per month before hiking the benchmark interest rate. Decline in bond prices will result in higher yields.

Moreover, the Trump administration indented to raise corporate tax rate from 21% to 28% in order to finance his administration's proposed $4 trillion infrastructure development plan. Therefore, higher input prices and higher tax rate likely to affect profit margins of businesses.

Moreover, higher interest rate is detrimental to growth-oriented companies, especially the technology companies. Consequently, shares of big techs like Apple Inc. (AAPL - Free Report) , Alphabet Inc. (GOOGL - Free Report) , Facebook Inc. (FB - Free Report) and NVIDIA Corp. (NVDA - Free Report) plummeted 3.5%, 1.6%, 1.3% and 3.3%, respectively. Apple and Alphabet sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Economic Data

The Department of Commerce reported that trade deficit jumped 5.6% in March to $74.4 billion, highest since January 1992. The consensus estimate was $74.1 billion and February's deficit was downwardly revised to $70.5 billion.

Factory orders in March increased 1.1% compared with the consensus estimate of 1.3%. February's data was revised to a decline of 0.5% from a decline of 0.8% reported earlier.

Domestic vehicle sales increased to 13.9 million from upwardly revised 13.6 million in February. Total vehicle sales increased to 18.5 million from upwardly revised 18 million in February. The consensus estimate was 17.7 million.

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